Pork Signals: Push Back Against the Blahs

Look for the bright spots in the strength of the U.S. chain. The U.S. pork industry marketing exhortation, “Don’t be blah!”, was aimed at consumers in a dietary rut, but now it’s come full circle as the pork industry fights to shrug off the “blahs” in the first half of 2019. While global pork demand is promising and could improve throughout the year, a scaled-up production capacity combined with incremental productivity gains and cheap feed will keep weights up and pigs flowing to harvest at record levels. That means profits will be slim, with losses hanging around too long for anyone to relax.

We find ourselves at the beginning of the new year with a bountiful supply of all the major feed crops and the three main U.S. protein production chains filled to the brim. Ethanol remains the biggest single user of the U.S. corn supply, so the increased consumption of soybean meal and corn, while certainly helpful for crop producers, doesn’t have the effect it did long ago.

Forecast
USDA is forecasting another huge crop year with ample carryover, albeit with a twist or two related to tariffs and so on that will not likely affect feed costs in the U.S. We expect 2019 to basically be blah — too much supply to create outstanding pork prices and continuing economical feed supplies to keep that first trend firmly in place.

This is the phase, after a major structural increase in production, where we have a little too much for current total demand and we also squeeze all related infrastructure from cold storage to transportation to harvest capacity. All of that will gradually give way to normal profits and expanded opportunity, but not likely in 2019.

Think of it as gearing up for the next three to five years all at once and reaching full production before the rest of the chain has made the investments to fully handle the loads. It’s this stress that brings forth the increased investment in the rest of the chain all the way to the consumer to normalize profitability in the production phase.

Costs
Cost control will be paramount this year. Firms that have gotten sloppy, whether it be with current technology or those that are failing to invest in more precision-based processes to extract marginal gains, will find themselves behind the eight ball.

These are the years that test the long-term mettle of the various players in the production chain, so expect weaker clusters or firms within the production chain to transfer ownership to more capable entities or to exit. Underinvestment in disease control, biosecurity and vaccination will take its toll this year. Although feed is relatively cheap, asset turnover issues with slow marketings, increased death loss and penalized weights, will rob those farms of both the throughput and best available prices while raising the cost per unit due to both mortality and sub-par marketing weights at normal marketing intervals.

Exports
In 2019 we will also begin to test the movement of a large portion of the U.S. pork chain to a producer-owned production/harvesting integration. The potential for both cost reduction and increased revenue is certainly possible when there is more transparency and information exchange between the harvest/processing phase and the production phase.

Like all advantages, it’s not automatic or guaranteed. It sets up the long-term advantage of making more precise and accurate investments in both production and marketing-to-harvest timing as well as proper investments in wholesale and export shares of the plants. Time will tell, but the beginning of this new phase of producer ownership of harvest/processing looks very promising.

We are always long-term optimistic on U.S. share of the export market. Our industry has too many outstanding advantages and will be the long-run source of choice for reliability, safety, choice, quantity, price and therefore value — a combination of all the preceding.

No one can match us. Even though there is ample room for many competitors in the export markets —and from time to time entities will outfox us or bring certain short-run advantages — the field belongs to the U.S. chain as long as it brings the game that it’s most capable of executing.